My Diary 567 --- The Pig Market Rally

May 05, 2009 --- The Pig Market Rally

With S&P regaining +ve territory for 2009 and the lows 30% behind us, the risk for investors has shifted. Volume last night was +$30bn for only the 10th time this year. In short, I saw a removal of risk premium and liquidity flow. Credit spreads globally gapped another leg tighter, even MEX 5YCDS narrowed by 32bp to 265. Clearly, the market thinks we are out of the woods. Interestingly, despite the surge in equities, USTs were little changed as the Fed bought $8.5bn in debt, the largest amount since March.

The back drop of this rally was based on some +ve “green shoots” as it is the 1st bear rally (in this cycle) associated with a bottoming in global LEIs and with slowing rate of cons EPS DGs --- 1) Economy wise, data continues to improve, including US home sales & construction, better credit conditions (SLOS), regional PMIs and encouragements from China; 2) News headlines of bank stress tests and additional 10s+ billions of equity raising ended up pushing US financials +10% higher; 3) NFP estimates at 700K seemed been countered as a lagging indicator. However, I have to say that the fundamental improvement has not yet caught up as actual growth remains weak/-ve. 

In Asia, April consensus EPS revision was flat, but net foreign buying has surged to US$8.2bn (the biggest month since Dec05). Position side, with the HSI having risen 13% in 3 days, it is painful to jump aboard the steaming train. As of yesterday, LOs remain underweight on the high beta markets of Taiwan and Korea.  HK is a classic short squeeze yesterday due to issuers forced to unwind delta hedge of callable bear options. Otherwise, I would need a very good explanation to value Chalco at HKD6.50 and Li & Fung at HKD24. That being said, if one didn't buy the market 30% lower few weeks ago, I do not think investor should chase it now at year-high. I seriously think that the market is at the final stage of the squeeze and soon will get a pretty big consolidation and it will all end up with tears. In addition, many still believe that valuations have run too far (AxJ =16X, HK =18X) and that there will be more pain down the road…What is the strategy, I suggest lets ride the wave in the meantime, while trimming the long/High-Beta positions gradually.

Overseas Market Reviews

Global equities moved up 2.8% overnight with +4.4% in EM, +3.5% in US and +1.7% in EU. Japan markets were closed. In general, equity benchmarks were up 30% from March’s low and 3% ytd. Notably, EMs have risen 21% ytd, compared to 1% in DMs. Elsewhere, 2yr UST edged up 2bp to0.93%, while 10yr was flat at 3.15% (5Mth high). IMWTI oil rises to $54.47/bbl, the highest close of the year. USD declined 1% both to EUR1.341 and EM currencies. The Dollar also slipped 0.3% to YEN98.8. DXY has weakened 6.5% over the past two months.